The Science Of VC Investments: How Family Offices Can Tap Into The Startup Opportunity In India

Recently, Infosys cofounder Kris Gopalakrishnan urged India’s wealthy to look at startups as a serious investment opportunity and not just a trend. “We need to flow the money of high net worth individuals (HNIs) into startups,” he had said.

Notably, the new generation of wealthy and high net-worth individuals (HNIs) have been focussing on wealth management and investments through family offices. Globally, as per a Crunchbase research of 2018, 193 family offices made over 1700 venture deals.

However, in India, there is still a need for larger involvement of family offices as there only a few players like Hero MotoCorp’s Pavan Munjal, Sharrp Ventures, Transworld Group of Companies, SAR Group Family Office, Ronnie Screwvala’s Unilazer, Dabur Group’s Burman Family Holdings, among others.

And the opportunity is huge. As per DataLabs by Inc42, between 2014-2019, Indian startups have raised $58 Bn across 5,011 deals. The startup ecosystem has grown leaps and bounds with over 50k startups in the country. Hence, there is no dearth of finding the right fit.

But where can HNIs and family offices put in their hard-earned wealth? 256 Network hosted a private session to dive into these specifics, with Rishabh Mariwala, cofounder of Sharrp Ventures; Sudhir Sethi, chairman of Chiratae Ventures; Nitai Utkarsh from the chairman’s family office at Hero MotoCorp; Chetan Mehta, CIO, Transworld Group; Vinod Abrol, CIO, SAR Group Family Office as panellists and Anirudh Damani, managing partner of Artha Venture Fund as the moderator. Of course, the big question is what keeps domestic capital away from the startup and VC ecosystem?

According to Mariwala, even in his experience, he had to convince his father to diversify their bets, rather than investing back into the company. Sharrp has invested in a few VC funds, startups as co-investments and saw the funds raise further capital, which raised their confidence in this private market.

He noted that the family needs to be operationally involved, especially the principal, who needs to play an active role with these investments. Family offices also need expert teams to manage the fund, as it’s critical. He also reassured that family offices can start small but gradually and come to a comfortable point.

Damani from Artha Venture Fund agreed with Mariwala and said that coming from a traditional stockbroking family, it was a huge challenge for him to convince his family to move assets into an unlisted market, and he had to assure that the capital was not going to get lost.

Hero MotoCorp’s Ukarsh further noted that for companies that have made money through traditional or legacy businesses, the family office setup takes time and convincing. For this, the family will need consistent information — about early successes, valuations and more — because they don’t necessarily realise how good or bad a situation is in a private market.

According to him, the change can come when there is more entrepreneurial representation in family offices.

Mehta from Transworld also emphasised on the importance of sharing information and maintaining transparency. He noted that proactive communication will go a long way to see VCs and startups as an asset class and push for interest. Mehta further said that the VC community needs to step up on educating family offices by reaching out and keeping them informed.

The Science Of Venture Investing

Addressing these communication challenges, Chiratae’s Sethi said it’s imperative to inform family offices about the science of venture investing. He noted that venture investing is a science and has its own nooks and crannies, which need to be communicated to the family offices.

Sethi said that the VC firm started raising Indian capital because they believe for meaningful growth, they need better allies with better learning and experience. Family offices often question advisors about what exactly VC firms do, because the industry is opaque and without telling them, they can’t be expected to join in.

Hence, it’s crucial to explain venture investing— portfolio construction, stage of investing, reserve management policy, exits, treasury management policies, mortality rate, valuation policy, team economics, cost.

Vinod Abrol of SAR Group Family Office says that family offices would look into the quality of deal, performance, governance, team etc. He also noted that family offices will also like to look into the deal flow for the opportunity of co-investments etc.

Abrol also noted that family offices would like to outsource expertise to VC, where they can share SWOT analysis of a startup, help pick the right way for a deal or investment etc.

Utkarsh from Hero MotoCorp said that the family office utilises VCs as real advisors to VC space and the firm looks for people who can advise families where to invest, are hustlers in the space etc.

Mehta from Transworld said that for inexperienced family offices, going through VCs should be the first step. He said that with learning from VCs, their founders etc and building proactive communication, family offices can build an understanding of the space.

Returns Expectations For Family Offices

Experience of the fund manager, past performance and team strength with corporate governance should be the key indicators for family offices when looking for VCs to invest with. Similarly, for Utkarsh, the top three is process, network and team; while for Mariwala it is industry experience, core team and past experience process.

On the other hand, Chiratae’s Sethi believes that family offices shouldn’t rush into evaluating a VC. They should take six months to a year and be diligent in the process, understand the ecosystem and science of venture investing, the strategic value of some investments in case of large family-run corporations and the viability of the investor in the long run.

Talking about returns expected from VCs, Transworld’s Mehta said that he would expect 16% to 18% of internal rate of return (IRR) in dollar terms, net fees and other charges. But for the VCs doing Series A or above, the return rate should be 15%; while for early-stage VCs, return should be 20%-25%. In the case of direct deals, it should be 25% return, according to Mehta.

Sharrp Group’s Mariwala said that he would expect 18%-22% IRR on the venture side, while Abrol said that he would stay in the same range for the venture side, but on direct deals, he would expect 25%-28% return.

Given the current slowdown pandemic, the panellists seemed to agree that the recovery phase is uncertain. Sethi noted that VCs were now doing stress tests in their portfolio — cash stress tests, business model stress tests, product and service tests etc which forced boards to work together. He also noted that their LPs have been lending a supporting hand, which makes it a good time to invest.

256 Network plans to have more conversations to bring together family offices and venture capitalists for more fruitful discussions. 256 Network is an invite-only network bringing together global decision-makers investing in the Indian startup ecosystem. With a curated membership, the network hosts senior leadership across VC, PE, CVC, Sovereign Funds, Endowments, Fund of Funds, and Industry Affiliates. The network functions to catalyse seamless access and action amongst its like-minded peer group.